Green Financing Issues in Malaysia

Introduction to Carbon Trading and Its Initial Impact

Financing via carbon trading has been somewhat effective in its early use as part of the Clean Development Mechanism policies. This is essentially financing through other richer countries receiving emission credits in exchange for investments in projects within developing countries that would lower GHG pollution. Examples of this project’s success include the Air Hitam Sanitary Landfill power generation, which takes advantage of the biogas produced from idle landfills; but more importantly, the Takon Palm Oil Mill in Sabah. It has an “annual input capacity” of 129,600 meters cubed/year Palm Oil Mill EFBs. Not only can this amount to a “monetary value” of US$2 million annually on average, but it will also reduce the threat of methane being released as an externality of palm oil production (UNFCCC, 2023).

Challenges in Promoting Sustainability

In theory, however, this does not promote sustainability for the recipient of the emission credits in richer countries as they are purchasing their way out of reducing their own GHG pollution. Barring ethics into consideration, carbon trading can lead to more renewable projects for a green economy. Funding is also derived from the Green Technology Financing Scheme (GTFS) along with support from Islamic banks. The GTFS secures promising green projects by providing 60% of the financial requirements with a low 2% interest rate, to reduce the risk for financial institutions. In addition, this is a serious effort by the Malaysian government as the scheme was planned to allocate RM 3.5 billion (US$850 million) into sustainable projects, which would also encourage further borrowing from banks. This was successful as within 3 years of the scheme, there had been 109 projects funded (Malaysian Green Technology Corporation, 2023).

Islamic Banking and Green Financing

As an Islamic country, Malaysia can take advantage of Islamic banking to further reduce the risk of green projects by splitting the profits through Mudarabah and Musharakah deals, allowing the bank and the entrepreneur to provide assets with both parties reaping the profits; also using banking expertise for “profit generation and financial management,” necessary for green projects that require extended time periods to solidify the value of its returns as an investment. Furthermore, it is a pro-Islamic belief that the environment should be well maintained, which could, although unlikely, influence Islamic banks’ decisions. However, the green market is hindered by the lack of coordination with experts in that field with financial institutions causing information asymmetry (Ali, 2023).

The Future of Sustainable Projects in Southeast Asia

Sustainable projects are relatively still a young industry (especially within Southeast Asia) where financial institutions may be uncomfortable in contrast to funding traditional businesses with expected returns. But, it can be expected that this obstacle can be bypassed as more nations familiarise themselves with methods of reducing CO2. In tandem, funding for green projects can thus be independent of financial problems within the current economy; should it be successful in execution, financial institutions could eventually produce a suitable funding structure for green projects, with enough experience. This proves to be a critical core in sustaining a functioning green economy. The development of these projects is crucial as the region faces pressing environmental challenges that demand immediate and effective responses (ASEAN Centre for Energy, 2023).

References

• ASEAN Centre for Energy. (2023). The Role of Sustainable Projects in Southeast Asia's Future. Retrieved from https://aseanenergy.org
• Ali, M. (2023). Islamic Banking and Its Influence on Green Financing. Journal of Islamic Banking and Finance, 15(2), 34-45.
• Malaysian Green Technology Corporation. (2023). Green Technology Financing Scheme Success Stories. Retrieved from https://greentechmalaysia.my
• UNFCCC. (2023). Case Studies on Clean Development Mechanism Projects. Retrieved from https://unfccc.int